Tesco set for another profit fall

Tesco is set to reveal a second year in a row of slumping profits on Wednesday, piling further pressure on embattled chief executive Philip Clarke

Tesco at Kingston Park
Tesco at Kingston Park

The squeeze on Britain’s established supermarkets will be highlighted this week when the sector’s biggest player reports another decline in annual profits.

Tesco is set to reveal a second year in a row of slumping profits on Wednesday, piling further pressure on embattled chief executive Philip Clarke.

Latest industry figures showed that Britain’s biggest supermarket saw its market share fall to 28.6% in the 12 weeks to March 31, from 29.7% a year earlier.

Analysts on average expect to see underlying pre-tax profits at the group shrink by 15% to around £3bn for the full year.

Mr Clarke is in the midst of a £1bn turnaround plan which was launched in the face of last year’s first fall in group profits in nearly 20 years.

Tesco has been retrenching from loss-making international businesses to focus recovery efforts on the UK, where it is scrapping more than 100 major store developments and focusing growth on convenience stores and online.

It is also looking to transform stores into family-friendly retail destinations with the addition of the Giraffe restaurant chain alongside larger stores.

Last week, it emerged that finance director Laurie McIlwee is to step down after 14 years at Tesco amid reports that he had lost faith in his boss’s strategy to turn around the company’s performance.

Mr McIlwee said he would stay on until a successor is found but warned that Tesco faces a period of “unprecedented change” in the supermarket industry.

Tesco and its “big four” rivals are seeing their market shares gnawed away by discounters Aldi and Lidl in what Morrisons chief executive Dalton Philips believes is the biggest structural shift in the grocery sector since the 1950s.

Tesco, Asda and Morrisons have all pledged price-cutting strategies to take on the newer rivals.

Tesco’s latest trading update revealed like-for-like sales fell by 2.4% over the Christmas and New Year period, while Hargreaves Lansdown analyst Keith Bowman said a 2% decline was expected for the fourth quarter to February.

He said there would be close attention on whether Tesco upped the ante in its price-cutting strategy – for which it has previously pledged £200m – in the wake of initiatives from rivals.

“An aggressive change of strategy continues to be considered by analysts, with Tesco potentially able to inflict damage on rivals, sacrificing profit in order to regain recently lost market share,” he said.

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FTSE 100 house builder Persimmon updates the City on its recent performance on Wednesday in the wake of jitters over the sector that have put pressure on shares.

There has been speculation that lenders are planning to rein in mortgage approvals due to fears of a housing bubble.

Like other builders, the company has been buoyed by the boost for the housing market provided by the Government’s Help to Buy scheme.

Latest figures from Halifax showed house prices lifted by 8.7% annually in March and that they are continuing to rise at their strongest yearly pace since 2007.

Annual results published in February showed Persimmon’s earnings had surged by nearly 50% last year, as it revealed 2014 had also got off to a good start.

The Charles Church and Westbury Partnerships builder said the property market revival had sent pre-tax profits up by a better-than-expected 49% to £330m in 2013, spurred on by initiatives such as Help to Buy.

But Goldman Sachs has taken Persimmon off its “conviction buy” list after reviewing its strategy on builders following their strong run – though it says prospects for the industry look bright and that Persimmon remains a “buy”.

Meanwhile, UBS has upgraded the stock to “buy”, arguing that a high valuation is justified by strong growth and returns.

Analysts at Deutsche Bank said the interim management statement, which is being published on the same day as Persimmon’s annual general meeting, was likely to show a continuation of the strong selling rate reported in its last update.

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